With the rise of artificial intelligence, microprocessors are aimed at performing more advanced functions, giving Beijing a golden chance to catch up.

The U.S. and China may be on the verge of settling the immediate trade war, but regardless of how far-reaching an agreement is made, economic tensions and competition will persist for years.

The reason? The battle over microprocessors, those little silicon chips that power essentially every technology device, is just getting started. When you throw artificial intelligence into the mix, things will get downright combustible.

A pair of news developments this week helped illustrate the issue. In one, the U.S. Semiconductor Industry Association (SIA) called for a dramatic increase in federal funding for chip research – from about $1.5 billion to $5 billion over the next five years. The industry represents all of the top American computer chip manufacturers, such as Intel (Nasdaq: INTC), Nvidia (Nasdaq: NVDA), Micron Technology (Nasdaq: MU) and Qualcomm (Nasdaq: QCOM).

The plan, titled "Winning the Future," sets a focus on "ensuring the United States wins the race to harness the transformative, semiconductor-enabled technologies of the future, including artificial intelligence, quantum computing, and advanced wireless networks."

A day earlier, some 7,000 miles away in Beijing, Technode reported that Chinese smartphone maker Xiaomi (HKEX: 1810) is forming a new subsidiary that will focus on Xiaomi's goal of becoming a chipmaking behemoth. The venture is part of the company's $1.5 billion initiative on artificial intelligence of things (IAoT).

The story is indicative of how China's smartphone manufacturers – Huawei, Oppo, Xiaomi, Vivo, and others – are moving to make their own chipsets to power their increasingly sophisticated products for tasks such as image processing and video decoding. They are also looking ahead to the rollout of 5G next year, with all the connected devices that technology will enable.

ZTE Serves as Wake-up Call

The U.S. dominates the global semiconductor industry, with a 44 percent global share, according to the SIA. Chips are the fourth-biggest American export, trailing only planes, refined oil, and autos. But U.S. chipmakers are looking over their shoulders – and for good reason.

China is making a huge push to catch up. When President Trump banned semiconductor exports to the Chinese phone and telecom equipment maker ZTE (OTC: ZTCOF), it temporarily broke the company. ZTE was forced to shut down virtually all of its business until the Trump administration relented.

The episode woke up China's leadership and made it realize what a serious problem it had. President Xi Jinping set new national goals to make China's telecom and phone companies much less reliant on American technology. Tech giants, such as Huawei, Baidu (Nasdaq: BIDU) and Alibaba (NYSE: BABA), are throwing themselves into crash programs to make their own chips.

But these are not the chips of yesterday, driven by Moore's Law, which said that microprocessors doubled their capabilities every two years while the price dropped. Instead, new types of chips are designed to exploit AI – running neural networks for such tasks as voice recognition, instant translation and image processing.

China Gaining Ground

"These chips handle data in a fundamentally different way from the silicon logic circuits that have defined the cutting edge of hardware for decades," MIT Technology Review wrote recently. "It means reinventing microchips for the first time in ages."

"China won't be playing catch-up with these new chips, as it has done with more conventional chips for decades. Instead, its existing strength in AI and its unparalleled access to the quantities of data required to train AI algorithms could give it an edge in designing chips optimized to run them."

The Deloitte accounting firm forecasts that revenue from semiconductors made in China will grow by 25 percent to $110 billion this year from an estimated $85 billion in 2018. It attributes this to the increasing domestic demand for chipsets "driven in part by the growing commercialization of artificial intelligence (AI)."

This looming competition will set the stage for who dominates one important industry after another over the next several decades. The U.S. leads now and wants to stay ahead, partly because of security concerns about China's equipment. China, meanwhile, looks weak when it must rely so heavily on imported microprocessors. Despite its growing manufacturing prowess, it can supply only a small fraction of its own needs right now.

It aims to change that. At stake are the foundations of the entire digital economy – from military applications to cars and other consumer products to industrial components of all kinds.

While China has lagged in traditional microprocessors, its bid to become a global semiconductor powerhouse seems well-timed.

"As everyone jumps to new technologies, from quantum computing to specialized AI chips," the Economist noted, "China has a rare chance to catch up."